Many hospitals have entered into shared service arrangements or have joined with other hospitals to form a merged system. While such arrangements have important implications for the comprehensiveness, availability, and quality of care, their ultimate desirability depends importantly on the resulting cost savings. The objective of this project is the empirical study of hospital costs and the assessment of the cost effects of shared service arrangements and mergers. The research methodology involved the estimation of cost functions for hospitals as a whole and for departments within hospitals and then the use of those cost functions to estimate the cost differences between those hospitals that share a service or are merged and those that do not share or are not part of a merged system. The total cost functions for hospital departments may also be used to predict the cost effect of the elimination of a department such as obstetrics or an emergency room. The cost functions used are specified in terms of measures of volume and in terms of the prices of the inputs to hospital care. The data used in the reseach are from Hospital Administrative Services reports, the American Hospital Association Annual Survey of Hospitals, and the National Survey of Shared Services.